Corrections or additions?
This article by Michele Alperin was prepared for the April 12, 2006
issue of U.S. 1 Newspaper. All rights reserved.
New Jersey Economy: Half Full or . . . ?
It’s hard to imagine anyone who has studied New Jersey economic trends
longer or more thoroughly than James Hughes, dean of the Edward J.
Bloustein School of Planning and Public Policy at Rutgers University
and a man whose planning career began at Rutgers as a graduate student
nearly 40 years ago.
“A good part of planning,” Hughes says, “involves looking into the
future.” For years Hughes has analyzed potential land uses, looking at
what types of structures are feasible to build where. He has drawn on
demographic data to figure out what type of housing a community would
need in the future. And over the years he has unrelentingly tracked
employment data – if you’re trying to figure out where to build more
office buildings, you have to know whether there will be jobs and what
the shape of the future economy will be.
To paraphrase the old stockbroker commercial, when Hughes speaks,
people listen. These days he portrays the national economic picture as
a “goldilocks economy, not too strong, not too weak, just right.”
But in New Jersey, Hughes says, the economic cup can be viewed as
either half full or half empty. On the one hand, he says, the state
“has an enormously potent, leading edge, core economy – and an
employment base that is the envy of most states.”
New Jersey, Hughes reminds us, enjoyed a spectacular reinvention
between 1980 and 2000, when it “was transformed from a fading
manufacturing dynamo into a leading edge, post-industrial,
knowledge-dependent economy – with Mercer County a major participant.”
Job gains were in high-paying sophisticated services in the financial
activities, information, and professional and business services
sectors – the core of the new “information age economy.” This growth
counterbalanced the state’s loss of manufacturing jobs, cut in half
between 1970 and 2002.
More recently, however, employment growth has slowed significantly in
the state, newly created jobs are generally lower paying than those
lost, and some of New Jersey’s core economic assets have eroded.
Although the state’s reinvention of itself as a knowledge-driven
economy in the 1980s and 1990s resulted in a per capita income that
was 29 percent higher than that of the nation as a whole, that edge
had worn down by 2004, from 29 to 26 percent.
With the new millennium, total employment in New Jersey also started
to change. Between December, 2000, and July, 2002, New Jersey lost
62,200 jobs. As the national economy resumed its growth in 2004 and
2005, New Jersey’s employment growth has been lagging badly. Job
growth in 2004 and 2005 averaged 40,000 jobs per year as compared to
77,000 jobs per year in the last two expansions. And now in January
and February of this year the state has added only 2,200 jobs total,
which translates into an annual growth of just 13,000 jobs. In 2005
New Jersey ranked 35th among the 50 states in the rate of growth of
total employment.
To make matters worse, all of the state’s employment gains so far in
this decade have been in low paying sectors like leisure and
hospitality, and education and health services, with no growth in
high-paying office jobs. Between 2000 and 2005, New Jersey has lost
118,000 high-paying jobs, replacing them with 115,000 low paying jobs.
As Hughes describes it, offices are “the factory floors of the new
economy.” A total nonplayer in 1980, the 11-county northern and
central New Jersey office market, which includes Mercer, emerged as
the fifth largest metropolitan office market in the country by 1990.
Much of this growth was in sprawling suburban growth corridors, like
the Princeton-Route 1 corridor, which by 1990 was a world center for
the activities of the new economy.
It’s not a surprise then, that while the nation’s Class A office
vacancy rate now stands at 15 percent, New Jersey’s is 21 percent.
So why is New Jersey being left in the dust? “It appears that we have
been maintaining our standard of living the old fashioned way,” says
Hughes, “by borrowing and living off of our core set of economic and
income assets.” Although New Jersey still has a high relative income
position, a very powerful core economy, and a vast repository of
wealth, the state’s economic realities have changed.
“For more than two decades, New Jersey had been the economic
locomotive of a lagging region,” says Hughes, “but now it is a
caboose, a full participant in the Northeast regional lag. Our current
prosperity has been obscuring the start of a long-term erosion of our
once unique and powerful economic assets.” One contributor to the
state’s loss of high-paying jobs is the loss of employment in the
science and technology sector. Between 1990 and 2004, New Jersey’s
share of the nation’s high-technology employment has declined from 5.2
to 4.1 percent. During that period, New Jersey lost 9,800 high-tech
jobs, while the nation gained 1.3 million: 150,000 in Texas, 115,000
in Virginia, 73,000 in Georgia, and 47,000 in North Carolina.
One example is the high technology wired telecommunications sector,
which cut its employment in half between 1995 and 2004, from 50,000 to
25,000 jobs – led by the falls of AT&T and Lucent. In 1990 NJ had 7.8
percent of the nation’s wired telecommunications jobs, but by 2004 it
had only 4.7 percent.
Although one of the replacement sectors, wireless telecommunications,
has been growing in New Jersey, its share of this sector nationally
has declined from 4.2 percent in 1990 to 2.8 percent in 2004. And for
every eight wired telecommunications jobs lost since 1990, New Jersey
gained only one wireless job. “New Jersey is losing its national role
as ‘telecommunications central,’” says Hughes, especially with Fort
Monmouth due to close, SBC’s purchase of AT&T, and the Lucent-Alcatel
merger.
Another hard-hit area is the pharmaceutical industry. For a state that
has often been called the nation’s “medicine chest,” New Jersey’s
share of total national pharmaceutical employment declined from 20.2
percent in 1990 to 13.8 percent in 2004, with the state losing 4.1
percent of its pharma jobs in that period. During the same period,
national growth in pharma employment was 40.4 percent. California,
which in 1990 had barely half the number of pharmaceutical jobs in New
Jersey, replaced New Jersey in 2004 as the state with the highest
number of pharma jobs.
And Princeton, Mercer County, and central New Jersey cannot forever
count on being exceptions to the state’s circumstances, argues Hughes.
“It has done a little better the last three or four years. Mercer has
one of the lowest office vacancy rates of any of the submarkets in New
Jersey.”
Hughes also cited as positive Merrill Lynch’s decision to consolidate
many of its New Jersey facilities in Hopewell in the late 1990s. “We
have a pretty strong diversified economy, and in the current decade
have done better than the state. Ultimately Mercer will track the
state as a whole; it is pretty hard to deviate too far for too long.”
The big picture, statewide changes “should serve as a wake up call
that we can no longer take our economic and technological well-being
for granted,” says Hughes. If New Jersey is to escape, Hughes believes
that the government will have to step in with changes in public policy
– “because every other state is doing it.”
As a first step, New Jersey needs to regain the confidence of
corporate America. Last month, the Tax Foundation in Washington
released its 2006 State Business Tax Climate Index, which ranked New
Jersey as 49th, with only New York behind it. This image, says Hughes,
“portends a continued pattern of lagging economic growth in New
Jersey.” To change our future, according to Hughes, “we need to
totally reinvent and rebrand.”
So Hughes is speaking up and people are listening. Earlier this week
he testified at a state senate committee reviewing the details of
Governor Corzine’s proposed budget and tax increases. Last week he
appeared at a meeting of 55 Plus, the nonsectarian group of senior age
men and women who meet at the Jewish Center of Princeton to socialize
and discuss contemporary issues.
A member of that audience asked Hughes to elaborate on the reasons for
this hostile business environment. Hughes pointed out that the
business climate is basically the flip side of the tax environment,
and New Jersey’s business taxes are severe. One problem, which Corzine
is proposing to change, is the absence of a provision that would allow
businesses to carry forward a loss to shelter future income. This has
been particularly injurious to small entrepreneurial firms, according
to Hughes.
Another problem is the alternative minimum assessment, which requires
a minimum tax payment even in the face of a total business loss. This
provision has pressed hard on the struggling new firms that are
responsible for major job creation.
Yet another problematic feature of New Jersey’s taxes, which Corzine
has proposed removing, is the 8.9 percent assessment on people earning
a half million or more. This provision is pushing high-wage earners
out of the state, as tax accountants advise their clients to move to
places like Florida or Jackson Hole, Wyoming. To avoid this tax, high
tech entrepreneurs who are planning to sell off their companies move
out of New Jersey before the sale to avoid this tax.
Another element of the rebranding New Jersey needs has to do with
support for research. In response to a question about the proposed
budget cutbacks at Rutgers, Hughes says that, “at the scale proposed
for the Bloustein school, I will have to find $650,000 to cover the
cutbacks, assuming no tuition increase. This will force a significant
restructuring of the entire university enterprise if the cuts hold.”
Then he broadens the perspective. “The high-end, new industrial
research model in the United States is not large freestanding labs,”
he explains, as it was in the past. “The new model is to partner with
universities and locate near centers of university excellence,” he
adds, citing Merck’s major research center in San Diego, and
Novartis’s in Cambridge, Massachusetts. Rather than taking advantage
of its own existing and potential “centers of excellence, says Hughes,
“New Jersey has systematically under-invested in its research
universities.” But to successfully compete for research dollars, we
need to not only maintain, but to build up our resources.
Corzine has proposed the Edison Innovation Fund, which would combine
state bond money with investments from biotechnology firms and private
foundations to spur embryonic stem-cell research and offer research
funding for nanotechnology and alternative energy. Despite the risk,
says Hughes, “we must take some part of our tax resources and invest
in the future.”
When establishing a new research venture, politics sometimes
undermines what is in the best interest of the state. Take the Stem
Cell Institute, which Governor McGreevey proposed as a joint project
of Rutgers and UMDNJ, situated in New Brunswick. The current proposal
includes research labs in Newark and Camden, and Hughes observes, “Now
we will have will have three mediocre centers rather than one
excellent one.”
One area that Hughes believes will not strongly affect New Jersey is
outsourcing. “How destructive will the impact of outsourcing be on
white collar jobs in New Jersey and the post-industrial economy?” a 55
Plus attendee asked.
Although Hughes admitted that this had hurt to some degree,
particularly in telecommunications, he urges a longer view. “If we
straight-line current trends, we’re doomed. But we can’t do that
because ultimately costs will equalize,” he says, citing anecdotal
evidence that China has a shortage of skilled labor and labor costs
are growing dramatically. He says there are also economic benefits to
outsourcing: We can acquire technology more cheaply and buy more
computers, thereby increasing the efficiency of our economy.
Hughes is not shy about his prognostications – he is well prepared for
his chosen role as economic prognosticator, even though he followed an
unusual path. Born and raised in Elizabeth, New Jersey, his bricklayer
father died in 1957, when Hughes was in junior high school. His
mother, who had been a homemaker, went back to work in various
positions at the Berry Biscuit cookie factory.
A state scholarship enabled him to be the first in his family to
attend college. As an undergraduate at Rutgers University he chose an
unusual major, one that combined civil engineering and city planning.
“I took it seriously; I felt I had an obligation,” he says.
After two years in the Army, including a stint with the United Nations
command in South Korea, he came back to New Jersey in 1967. At that
time the Rutgers campus was starting an urban planning program, and
they told him, “We need students.” He stayed on as part of the new
Ph.D. program, and in 1971 was offered a job as an assistant
professor.
At Rutgers in the early 1970s he met his wife, Connie, who also has a
degree in planning. She is now commissioner of the Board of Public
Utilities and she herself is a former U.S. 1 cover subject, profiled
in 1990 when she was with the State Data Center in the Department of
Labor, linking the Census Bureau with data users, assisting them if
they had questions on demographic or population trends.
At that time Hughes was contributing editor to American Demographics,
“We got a lot of razzing,” he recalls. “People wondered what we talked
about at dinner.”
When he is out in public, as he often does, Hughes does manage some
optimistic observations, despite his humorous observation that he is
often called the Doctor Kevorkian of economics. Despite all the
state’s problems and relative erosion, Hughes acknowledges, New Jersey
does maintain several demographic strengths:
1. In 2004, according to the American Community Survey, New Jersey
continued to have the highest median household income among the 50
states. The one caveat here is that New Jersey also ranks first among
the states in median housing costs. While New Jersey incomes are 38
percent higher than that of the nation, housing costs are 52 percent
higher.
2. New Jersey ranks third among the states in the percentage of
foreign born, 18.8 percent in 2004, and demographic diversity can be a
key advantage in a global economy.
3. New Jersey ranks second in mass transit usage among the 50 states,
and very few states have equivalent public transit infrastructures. On
the other hand, we rank third in length of commute (a ranking that
Hughes chooses to see as an illustration of our “unique transportation
fortitude”).
One member of the audience took umbrage at this supposedly positive
characteristic, saying: “You can’t get anywhere in this state on mass
transit,” except New York. Hughes agreed and disagreed. Yes, the
development patterns of the 1980s and ’90s were suburb sprawl and
office corridors on the freeways; homage to the automobile was a
given. But, no, the Northeast Corridor line is actually excellent,
making sites along it a good place for new office buildings.
Hughes cited the Gateway Center in Newark, which is accessible from
the Northeast Corridor as well as from Morris County, which is
connected by a light rail extension. “The existing rail infrastructure
is there, and we must take effective advantage of it,” he says. “These
can be job nodes even if people do not live there.” He added that Rush
Holt’s concept of Einstein Alley is based partly on New Jersey’s
unique concentration of higher education on this one railway, which
goes through Princeton, New Brunswick, and Newark.
4. The state ranks first in density. With 1,173 people per square
mile, New Jersey is more dense than either Japan or India. Again
looking on the bright side, Hughes suggests this demonstrates “our
demographic resiliency.”
5. Despite this density, a higher proportion of New Jersey is covered
by forest even than states like California and Alaska, which, says
Hughes, “demonstrates our unique environment and quality of life – a
key advantage in a knowledge-driven economy.”
Speaking to a small group after his talk, Hughes sounded hopeful. The
necessary first step he mandates for a positive future is that “we
must straighten out the fiscal mess first and must do it this year.”
He thinks Corzine is headed in that direction, starting with selective
business tax cuts. The state also needs to bring in more money, and
Hughes suggests that a one percent increase in the sales tax would
probably be the best step: “Since food and clothing are not taxed,
it’s not that regressive.”
His conclusion combines the pragmatism of an engineer with the trust
in the future that fuels a prognosticator: “I’m a pessimist at heart,
but Corzine gets it.”
— Michele Alperin
Corrections or additions?
This page is published by PrincetonInfo.com
— the web site for U.S. 1 Newspaper in Princeton, New Jersey.
